Drilling lawsuit could set precedent

Landowners' claim seeks release form lease extensions

Feb. 19, 2012

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A federal lawsuit filed by Tioga County landowners may set the pace in a statewide legal scrum over the ability of energy companies to forcibly extend their leases.

Denver-based Inflection Energy, one of the most active energy companies in the Southern Tier, is facing a federal lawsuit filed by 18 landowners, representing about 1,200 acres, whose leases were forcibly extended through "force majeure" claims.

Many of the landowners are locked into leases that pay as low as $2 per acre per year, but aren't seeking monetary compensation, according to Robert Jones, an attorney for Binghamton-based Coughlin & Gerhart.

"All they're looking for at this point is to get released from the current leases that they believe are expired," Jones said.

Force majeure clauses, included in most oil and gas leases, allow a company to extend the length of the lease in the case of an unforeseen event that hinders the terms of the contract.

The type of hydrofracking needed to extract large volumes of natural gas from shale rock formations like the Marcellus and Utica has been off-limits since 2008, when the state Department of Environmental Conservation began its ongoing environmental impact review.

"Inflection regrets the fact that these landowners have chosen to file this litigation," Inflection CEO Mark Sexton said, "but believes that we are all in a difficult situation due to the extraordinary circumstances in New York state where Inflection cannot obtain permits to develop the valuable shale resources that are believed to exist in the vicinity of these properties."

He added: "New York is the only state in this country that is chosen to suspend the issuance of permits to develop indigenous resources. As such, we and the landowners have been put into this difficult situation for reasons beyond all of our control."

The lawsuit also names Victory Energy Corporation, of Indiana, Pa., and Megaenergy, of Englewood, Colo., as defendants. Inflection assumed operational control over the leases held by those two companies in July 2010, according to the civil complaint.

Jones said the Tioga County lawsuit is smaller and more focused than two other lawsuits filed in federal court against Chesapeake Energy in early 2011.

One of the lawsuits against Chesapeake was filed by Hinman, Howard and Kattell, and the other was filed by Coughlin & Gerhart.

Those two lawsuits were expected to set precedent on the issue, but have been locked in legal limbo since Chesapeake attempted to force the dispute to arbitration.

"We've been waiting, I believe, seven months for a decision from the court on that," Jones said of the Chesapeake suit, where his firm is also representing landowners. "This Inflection case doesn't have the arbitration clause, which is slowing down the other Chesapeake lawsuits."

The more focused lawsuit against Inflection may make its way through the court system first, Jones said.

The crux of the legal disagreement between energy companies and landowners is whether the inability to extract gas using hydraulic fracturing truly constitutes an unforeseen and unavoidable event.

Despite the state's regulatory stranglehold in high-volume hydrofracking, gas companies can still frack at wells using fewer than 80,000 gallons of fluid.

The civil complaint states: "None of the defendants can claim that it has been objectively impossible to drill for gas or oil in New York since July 2008 since, for example, 134 drilling completions were accomplished in the year 2009 alone. In 2010, 35.8 billion cubic feet of gas were produced in New York."

Much of this production came from other rock formations and have been exploited using methods other than high-volume hydraulic fracturing.

But Sexton said the plaintiffs have a burden to prove that drilling is viable in the vicinity of the leases, and Inflection believes that it isn't.

"Inflection has already attempted to develop other formations proximity to these leases, but has been unsuccessful in doing so," he said.

Sexton said there are about 1,200 gross acres affected by the litigation.

Inflection holds approximately 10,620 net acres in New York, and has asserted force majeure to extend leases on an undisclosed portion of that acreage, he said.

The civil complaint from the landowners also notes that Inflection acquired control of the leases in July 2010 — long after New York's de facto moratorium on hydrofracking began in 2008.

Sexton said the leases in question "were already extended by the force majeure clause when the assignment was made."

"As such, our knowledge of the force majeure circumstances has no bearing on the outcome of the litigation," he said.